Moody’s issued the following release today:
Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index declined 0.3% in January 2016…the decline is the first since the CPPI troughed in early 2010, and follows a flat performance this past December. Moody's/RCA CPPI measures price changes in US commercial real estate based on ‘repeat-sales,’ or completed sales of the same properties.
“The latest results indicate that commercial property price growth in the US has paused six years into the post-crisis recovery," says Moody's Director of Commercial Real Estate Research, Tad Philipp. "We consider this a significant milestone that signals that a shift in sentiment among commercial property investors is underway." The decline in the overall index was led by a 0.8% decrease in core commercial prices over the past three months, Philipp says. In January, office and industrial property prices each fell by more than 1%. Retail was the only core commercial property sector to show a gain in January, with prices rising 1.1%.
Does this spell the end of the rally in U.S. commercial real estate prices? One month’s decline makes it too soon to tell, but a pull-back in price appreciation is inevitable at some point. While financial market volatility may be dampening investor demand, it’s important to note that on a total return basis, REITs continue to outperform: For the year to March 3, the total returns of the FTSE/NAREIT All REIT Index dropped 0.1 percent, while the S&P 500 Index fell 2.1 percent. One metric to watch going forward? Sales volumes.
According to RCA, global investment in U.S. office buildings totals $4.2B year-to-date, behind the pace required to match 2015's record $28.8B in volume. Qatar is at the top of the investor list so far, but activity from Canadian investors has slowed, with oil’s decline likely to blame. While the Moody’s index has almost doubled since its January 2010 trough and is about 17 percent higher than its previous peak, it’s not unfathomable to see a slowdown in office markets that have advanced the most—such as New York and San Francisco, where prices have more than tripled since the market’s bottom.
Main image via Engel Ching/Shutterstock.com